Compound Formula

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Compound formula means compound interest. Compound formula comes in use when money is borrowed for a fixed period of time. The person has to pay extra money for that fixed period for which the money has been borrowed. A extra amount is calculated at a fixed rate. Compound formula is a tool to compute the compound interest. The formula for compound interest is given as:


A = P(1 + r/n)^nt, where A = Total amount; P = Principle amount; t = time; n = number of times the interest is compounded


Example 1: In a bank 1,500 has been deposited paying at 4 % annual interest rate, compounded every 3 months. Find the total amount after 5 years.


Solution: In the given problem

=> P = 1,500, r = 4% , n = 4 and t = 5.
=> Plugging into the compound formula the values
=> A = P(1 + r/n)^nt = 1500 (1+0.04/4)^4(5)
= 1500 (1.01)^20 = 1500 x 1.220 = 1830.285
=> Answer: Total amount after 5 yrs will be 1830.29 


Example 2: A man took a loan of 40,000 at a interest rate 5% for 3 years. How much will he have to pay after 3 years?


Solution: In the given problem

=> P = 40,000, r = 5% , n = 1 and t = 3.
=> Plugging into the compound formula the values
=> A = P(1 + r/n)^nt = 40000 (1+0.05/1)^1(3)
= 40000 (1.05)^3 = 40000 x 1.157625 = 46305
=> Answer: Total amount after 3 yrs will be 46305.




 

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